UCITS hedge funds underperform non-UCITS alternatives, EDHEC-RIsk finds

UCITS hedge funds are more volatile and underperform their non-UCITS hedge fund rivals, a new study on 24,000 unique hedge funds published the EDHEC-Risk Institute has found.

The research found that the domicile of a fund is an important indicator of a fund’s likely performance and that European domiciled funds deliver lower risk-adjusted returns compared to funds domiciled in other regions.

UCITS hedge funds underperform non-UCITS hedge funds on a total and risk-adjusted basis. However, UCITS hedge funds have more favourable liquidity terms and when we compare liquidity matched groups of UCITS hedge funds and non-UCITS hedge funds we find that their performance seems to converge.

There is an important liquidity-performance trade-off in the sample of UCITS hedge funds. Our results also show that non-UCITS hedge funds generally have lower volatility and tail risk than UCITS hedge funds, which is consistent with hurdles to the transportation of risk management techniques.

The study found domicile effects related to firm and fund performance. European-domiciled funds deliver lower risk-adjusted compared to funds domiciled in other regions. The risk-adjusted performance is highest for North American and Asia/Pacific-domiciled funds. We find similar performance between the main UCITS hedge fund domiciles. Ireland and Luxembourg-domiciled funds exhibit very similar performance measures.

“Investors are increasingly considering hedge funds as part of their investment universe, but are also searching for access to sophisticated risk management techniques within the regulated and transparent world of mutual fund products. We are delighted that this study supported by Newedge has been able to shed light on the way in which techniques are converging in the mutual fund and hedge fund universes and we think that the research will be of particular interest to institutional investors,” said Noël Amenc, director of EDHEC-Risk Institute.


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